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Wall Street Prep Webinar

An Insider’s Primer on Project Finance

Seminar 1: The who and why, structure and funding sources

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Introduction

A brief overview of project finance

• What is project finance?

• Who uses it and why?

• Structure and participants

• Introduction to seminar 2

• Structuring a project finance deal

• Risks

• Key metrics

The instructor

Project finance involvement for 10+ years

Managed projects from various angles including engineering, contract management, financial modeling, strategic and financing advice, negotiating and arranging financing

Project finance consultant across energy, infrastructure and mining

An expert trainer, training teams in project finance within banks, PE firms, funds and corporates

Haydn Palliser

Managing Director

BEng (Hons), MAppFin

haydn.palliser@corality.com

+1 646 771 5937

Wall Street Prep’s Project Finance Partner

Corality Financial Group is a global consulting firm specialising in training, financial modeling,

model auditing and transaction support.

• Thought leaders in the world of analytical consulting

• Offices in London, Sydney, New York

• Project finance trainers and leaders

Consulting Training Financial modelling

Model audit Transaction

support

Opportunities to learn more!

Corality runs public boot camps in project finance, including:

• 2-day best practice project finance modeling

• 2-day advanced project finance modeling

• Project finance: concepts and applications

• Project finance: transaction simulation masterclass

• Financial modeling for renewable energy projects

• PPP/P3/Infrastructure project modeling

Slide deck for the course

• Download:

http://wsp_coursematerials.s3.amazonaws.com/Webinars

Technical issues during the presentation:

support@wallstreetprep.com

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What is project finance?

A brief overview of project finance

• Project Finance is a means of financing projects with significant capital requirements and/or

which may not otherwise secure funding

• Financing assets or groups of assets (projects) – limited role

• Relatively small companies are able to build large and complex projects

• Non-recourse debt repayment, solely reliant on the cash flows of the project

• Typically applied to projects in Power and Energy, Natural Resources, Utilities and Infrastructure

(Social and Economic) industries

• It focuses on structuring risk through contracts to the parties most able to take it

But what is a project?

If you have procured all of the necessary:

- Components;

- Land;

Labour, etc.

Do you have a “bankable”* project?

*bankable = financeable project = a project which could raise third party finance, both debt and equity?

A brief overview of project finance

If you have procured all of the necessary components, land, labour, etc.; and

Have installed all of the components above; and

Your company produces the desired output

Do you have a “bankable” project?

No, not yet a bankable project!

… a “bankable” project is a set of contracts, which:

Regulate the relationships between the various parties involved in the project, including

builders, operators, clients, suppliers, etc.

Regulate the risk sharing between the various parties involved in the projects

Regulate the obligations and remuneration between the various parties involved in the projects

Generate sufficient cash flow to repay your debt / provide a return

Do you have a “bankable” project?

“Bankable” project

Project Company (“SPV”)

All required permits

Grid Connection Agreement

EPC Contract O&M Contract Management

Contract

Land Lease / Right to Use

Insurance Contract

Site Security

Fuel Supply

Offtake Agreement Financiers Developer

Timeline and completion

• The majority of the work is performed during the development phase

• Arranging finance takes ~3-6 months

• It is important that all parties (contractors, suppliers and financiers) agree on the contractual structure simultaneously – occurs at the Financial Close day

• Early involvement of a professional financial adviser and due diligence consultants is critical to the success of the project

• Completion and cash flow / contracted period

5 - 30 yrs 1 - 5 yrs

Closure Construction Operations

Financial Close Completion Refinancing

1 1-3 yrs 1 – 3 yrs

Development

Characteristics of project finance

• Capital Intensive – tendency towards large-scale projects (industry focused)

• Highly Leveraged – typical gearing of 50-75% (mezzanine debt ensures return to equity holders)

• Long Term – duration can typically reach 15-35 years

• Special Purpose Vehicle – project company typically established by sponsor to own and operate

the project

Characteristics of project finance

• Non-recourse Financing – Lenders only repaid from project cashflow

• Controlled Dividend Policy – Income to cover OPEX, debt service, tax and ROE

• Multiple Participants – technical and geographical scale demands many players

• Allocated Risk – identification and allocation of key risks is crucial

• Contracted cash flows

• Expensive – greater information requirements and contractual complexity increases overall

transaction costs

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Why use project finance?

Some alternative funding sources

• Corporate debt (capital markets / debt)

• Equity

• Venture Capital

• Convertible Notes

• Shareholder Loans

• Quasi debt / equity

Why Bother with Project Finance?

Can you achieve the same thing with corporate finance?

All required permits

Grid Connection Agreement

Land Lease / Right to Use

Insurance Contract

Financiers Developer

Projects

Why Bother with Project Finance?

Can you achieve the same thing with corporate finance?

All required permits

Grid Connection Agreement

Land Lease / Right to Use

Insurance Contract

Financiers Developer

Projects

Advantages: Simpler Easier

Disadvantages: Hard to transfer the ownership to 3rd parties Concentrated risk A single project may bankrupt the Developer Project > Developer Off-balance sheet financing

Other Consideration: Cost of Capital

Commercial drivers for project finance

• Limited or no recourse

• Risk sharing

• Involvement of joint venture partners

• Restrictions on level of corporate borrowing

• Tax advantages

• Local legislation

Characteristics of project finance

• Non-recourse Financing – Lenders only repaid from project cashflow

• Controlled Dividend Policy – Income to cover OPEX, debt service, tax and ROE

• Multiple Participants – technical and geographical scale demands many

players

• Allocated Risk – identification and allocation of key risks is crucial

• Expensive – greater information requirements and contractual complexity

increases overall transaction costs

Comparison to corporate finance

Common project finance funding sources

• Traditional project finance banks

• Capital markets

• Debt funds

• Asset or alternative funds

• Government

More on this in seminar 2..

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Structure and participants

Project finance structure

Participants

• Sponsor

o SPV owners (equity providers)

o Typically active in project (have a role)

o Financial capacity is still important

o Partnering and risk sharing

• Borrower

o Special purpose vehicle (SPV)

o Enters into contracts

Participants

• Construction contractor

o Fixed price / turnkey vs other structures, track record

• Operator

o Provide operations and maintenance

o Experience, fixed price

• Offtaker

o Credit risk

o Fixed price vs volume vs both

Participants

• Financiers

o Experience critical (structure / metrics / “problems”)

o Multiple lenders and structures (seminar 2)

• Advisors

o Helping bankability before going to banks

o Financial model is central to negotiation due to structure

o Legal, accounting / tax, insurance, technical, financial

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Seminar 2

Wrap-up

• Project finance is a viable and often compulsory alternative to capital intensive projects

• Risk allocation is a major driver

• Can provide additional leverage

• Is a well defined process, know the right steps

• Financial model is your main negotiation tool, metrics bespoke to project finance, scenarios!

Next steps

• Seminar 2 (register now!) covers:

o Cash flow waterfall and project financing structure

o Risk structuring

o Financial modeling & metrics

• Review the project finance courses on Wall Street Prep’s website

o Project finance modeling and theory courses

o Speak to Wall Street Prep for more information